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Contents iii

Contents

Chapter 1 It’s More Important to Be Happy Than to Be Rich . . . . . . . . . . . . . . 7

How Money Affects Happiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8It’s Not About the Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Chapter 2 The Road to Wealth Is Paved with Goals . . . . . . . . . . . . . . . . . . . 23

The Road to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Tools and Resources to Help You Achieve Your Goals . . . . . . . . . . . . . . . 29Coping with Mistakes and Setbacks . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Chapter 3 “Budget” Is Not a Four-Letter Word . . . . . . . . . . . . . . . . . . . . . . 37

Mapping Your Financial Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Building a Budget That Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Sticking to a Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Automating Your Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Why Budgets Fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Chapter 4 Defeating Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

The Power of Positive Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54The Basics of Debt Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Curbing Compulsive Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Start Now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Part 1: Blueprint for Financial Prosperity

The Missing Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Contentsiv

Chapter 5 The Magic of Thinking Small . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Why Frugality Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Frugal Tactics Anyone Can Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77The Tyranny of Stuff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96Leading a Rich Life on a Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Chapter 6 How to Make More Money . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Working for Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Working for Yourself . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111Other Ways to Make Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118A Pep Talk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Chapter 7 Banking for Fun and Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

Choosing a Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130Finding Accounts That Meet Your Needs . . . . . . . . . . . . . . . . . . . . . . . 135Making the Most of Your Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 139

Chapter 8 Using Credit Wisely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

Credit Cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148Your Credit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Your Credit Score . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161Final Thoughts on Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

Chapter 9 Sweating the Big Stuff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Counting the Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167Buying a Car . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168Finding Deals on Vacation and Travel . . . . . . . . . . . . . . . . . . . . . . . . . 185Cash Is King . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

Part 2: Laying the Foundation

Contents v

Chapter 10 House and Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

The Eternal Question: Rent or Buy?. . . . . . . . . . . . . . . . . . . . . . . . . . . 196Buying a Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Owning a Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

Chapter 11 Death and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

An Introduction to Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219What You Need to Know About Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 230A Brief Overview of Estate Planning . . . . . . . . . . . . . . . . . . . . . . . . . . 239

Chapter 12 An Intro to Personal Investing . . . . . . . . . . . . . . . . . . . . . . . . 245

Why Invest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246The Tools of Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250Being on Your Best Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255Common-Sense Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

Chapter 13 Retirement: The Final Frontier . . . . . . . . . . . . . . . . . . . . . . . . 271

What Will Retirement Look Like? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272Figuring Out How Much to Save . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273Why You Should Start Saving Today . . . . . . . . . . . . . . . . . . . . . . . . . . 276A Brief Guide to Retirement Accounts . . . . . . . . . . . . . . . . . . . . . . . . 279Early Retirement and Other Dreams . . . . . . . . . . . . . . . . . . . . . . . . . . 288The Final Frontier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290

Chapter 14 Friends and Family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

Financial Blueprints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292Friends with Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292Love and Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296Church, Charity, and Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304True Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

Part 3: Building a Rich Life

It’s More Important to Be happy than to Be Rich 7

1 It’s More Important to Be Happy Than to Be Rich

“Happiness, not gold or prestige, is the ultimate currency.” —Tal Ben-Shahar

You  don’t  want  to  be  rich—you  want  to  be  happy.  Although  the mass media has convinced many Americans that wealth leads to happiness,  that’s  not  always  the  case.  Money  can  certainly  help 

you achieve your goals, provide for your future, and make life more enjoy-able, but merely having the stuff doesn’t guarantee fulfillment.

this book will  show you how to make the most of your money, but be-fore we dive into the details, it’s important to explore why you should care. It doesn’t do much good to learn about compound interest or high-yield savings accounts if you don’t know how money affects your well-being.

If  personal  finance  were  as  simple  as  understanding  math,  this  book wouldn’t be necessary; people would never overspend, get into debt, or make foolish financial decisions. But research shows that our choices are based on more than just arithmetic—they’re also influenced by a complex web of psychological and emotional factors. 

this chapter gives you a quick overview of the relationship between money and happiness. You’ll also learn techniques for escaping the mental traps that make it hard to be content with what you have. As you’ll see, you don’t need a million bucks to be happy.

Chapter 18

How Money Affects Happinessthe big question is, “Can money buy happiness?”  there’s no simple answer. 

“It seems natural to assume that rich people will be happier than others,” write  psychologists  Ed  Diener  and  Robert  Biswas-Diener  in  Happiness (Blackwell Publishing, 2008). “But money is only one part of psychological wealth, so the picture is complicated.”

there is a strong correlation between wealth and happiness, the authors say: “Rich  people  and  nations  are  happier  than  their  poor  counterparts; don’t  let anyone tell you differently.” But  they note  that money’s  impact on happiness isn’t as large as you might think. If you have clothes to wear, food to eat, and a roof over your head, increased disposable income has just a small influence on your sense of well-being.

to put it another way, if you’re living below the poverty line ($22,050 an-nual income for a family of four in 2009), an extra $5,000 a year can make a huge difference in your happiness. on the other hand, if your family earns $70,000  a  year,  $5,000  may  be  a  welcome  bonus,  but  it  won’t  radically change your life.

So, yes, money can buy some happiness, but as you’ll see, it’s just one piece of the puzzle. And there’s a real danger that increased income can actually make you miserable—if your desire to spend grows with it. But that’s not to say you have to live like a monk. the key is finding a balance between having too little and having too much—and that’s no easy task.

A recent article in the Journal of Consumer Research showed that, in general, our feelings for material purchases fade more quickly than they do for experiential purchases. Material goods depreciate: the day after you buy something, it’s usually worth less than you paid for it. Experiences, on the other hand, appreciate: Your memories of the things you do—vacations you take, concerts you go to—become fonder with time because you tend to recall the positives and forget the negatives.

The Fulfillment CurveAmerican culture is consumption-driven. the media teaches you to want the clothes and cars you see on tV and the watches and jewelry you see in magazine ads. Yet studies show that people who are materialistic tend to be less happy than those who aren’t. In other words, if you want to be content, you should own—and want—less Stuff. 

It’s More Important to Be happy than to Be Rich 9

Because Stuff has such an important role in your happiness (and unhappiness), it deserves a capital S. You’ll read more about Stuff throughout this book, especially in Chapter 5.

In their personal-finance classic Your Money or Your Life (Penguin, 2008), Joe  Dominguez  and  Vicki  Robin  argue  that  the  relationship  between spending  and  happiness  is  non-linear,  meaning  every  dollar  you  spend brings you a little less happiness than the one before it. 

More spending does lead to more fulfillment—up to a point. But spending too much can actually have a negative impact on your quality of life. the authors suggest that personal fulfillment—that is, being content with your life—can be graphed on a curve that looks like this:

Money spent

Survival

Comforts

Luxuries

Fulfi

llmen

t

Overconsum

ption

ENOUGH

The Fulfillment Curve

this Fulfillment Curve has four sections:

•  Survival. In this part of the curve, a little money brings a large gain in happiness. If you have nothing, buying things really does contribute to your well-being. You’re much happier when your basic needs—food, clothing, and shelter—are provided for than when they’re not.

Chapter 110

•  Comforts. After the basics are taken care of, you begin to spend on comforts: a chair to sit in, a pillow to sleep on, a second pair of pants. these purchases, too, bring increased fulfillment. they make you hap-py, but not as happy as the items that satisfied your survival needs. this part of the curve is still positive, but not as steep as the first section.

•  Luxuries. Eventually your spending extends from comforts to outright luxuries. You move from a small apartment to a home in the suburbs, say, and you have an entire wardrobe of clothing. You drink hot choco-late on winter evenings, sit on a new sofa, and have a library of DVDs. these things are more than comforts—they’re luxuries, and they make you happy. they push you to the peak of the Fulfillment Curve.

•  Overconsumption. Beyond  the  peak,  Stuff  starts  to  take  control  of your life. Buying a sofa made you happy, so you buy recliners to match. Your DVD collection grows from 20 titles to 200, and you drink expen-sive hot chocolate made from Peruvian cocoa beans. Soon your house is so full of Stuff that you have to buy a bigger home—and rent a stor-age unit. But none of this makes you any happier.  In fact, all of your things become a burden. Rather than adding to your fulfillment, buy-ing new Stuff actually detracts from it.

the sweet spot on the Fulfillment Curve is in the Luxuries section, where money  gives  you  the  most  happiness: You’ve  provided  for  your  survival needs,  you  have  some  creature  comforts,  and  you  even  have  a  few  lux-uries. Life  is grand. Your spending and your happiness are perfectly bal-anced. You have Enough. 

Yup, Enough gets a capital E, too. You’ll learn more about deciding how much is Enough later in this chapter. (And don’t worry: there aren’t any more words with goofy capitals ahead.)

Unfortunately, in real life you don’t have handy visual aids to show the re-lationship between your spending and your happiness; you have to figure out what Enough is on your own. But as you’ll see in the next section, be-cause we’ve been conditioned to believe that more money brings more happiness, most people reach the peak of the Fulfillment Curve and then keep on spending.

It’s More Important to Be happy than to Be Rich 11

Caught Up in the Rat Racetypically, as your income increases, your lifestyle grows with it. When your boss gives you a raise, you want to reward yourself (you deserve it!), so you spend more. All that new Stuff costs money to buy, store, and maintain. Gradually,  your  lifestyle  becomes  more  expensive  so  you  have  to  work harder  to  earn  more. You  think  that  if  only  you  got  another  raise,  then you’d have Enough. But in all likelihood, you’d just repeat the process by spending even more.

Psychologists  call  this  vicious  cycle  the  hedonic treadmill, though  you probably know it as the “rat race.” People on the hedonic treadmill think they’d be happy if they just had a little more money. But when they get more  money,  they  discover  something  else  they  want.  Because  they’re never content with what they have, they can never have Enough.

Most  Americans  are  stuck  on  this  treadmill.  According  to  the  U.S.  Cen-sus  Bureau  (http://tinyurl.com/census-inc),  in  1967  the  median  American household  income  was  $38,771  (adjusted  for  inflation).  Back  then,  less than one-fifth of U.S. families had color tVs and only one in 25 had cable. Compare that with 2007, when the median household income was $50,233 and nearly everyone had a widescreen color tV and cable. Americans now own twice as many cars as they did in 1967, and we have computers, iPods, and cellphones. Life is good, right? But despite our increased incomes and material wealth, we’re no happier than were in the ’60s. 

In case it’s been a while since your last math class, here’s a quick refresher: If you have a set of numbers, half of them will be greater than the median, and half will be less. the median is usually different from the average. For example, in the group of numbers 2, 3, 4, 5, and 101, the average is 23, but the median is only 4. (If econo-mists talked about average incomes instead of median incomes, their numbers would be skewed by billionaires like Warren Buffett.)

Since 1972, the National opinion Research Center has been polling Ameri-cans about their happiness (http://tinyurl.com/norc-gss). As you can see in the following graph, the numbers haven’t changed much over the past 35 years. About one-third of Americans consistently say they’re “very happy” with their  lives (http://tinyurl.com/gss-happy), while a little less than one-third say they’re “pretty well satisfied” with their financial situations (http://tinyurl.com/gss-satfin).

Chapter 112

Financial situationHappiness

45

40

35

30

25

20

15

10

5

0

1972

1974

1976

1978

1982

1984

1986

1988

1990

1993

1996

2000

2004

Info from the National Opinion ResearchCenter’s General Social Survey

If Americans are earning more, why aren’t they happier? We’ve been led to believe that prosperity brings peace of mind, but it turns out your grand-father was right: Money isn’t everything.

the  bottom  line:  Money can’t make you happy if your increased wealth brings increased expectations.  In  other  words,  if  you  want  more  as  you earn  more,  you’ll  never  be  content;  there  will  always  be  something  else you crave, so you’ll need to work even harder to get the money to buy it. You’ll be stuck on the hedonic treadmill, running like a hamster on a wheel.

the hedonic treadmill leads to lifestyle inflation, which is just as dangerous to your money as economic inflation; both destroy the value of your dol-lars. Fortunately, you can control lifestyle inflation. You can opt out, step off the treadmill, and escape from the rat race. to do that, you have to set priorities  and  decide  how  much  is  Enough. the  next  section  shows  you how.

How Much Is Enough?Kurt Vonnegut used to recount a conversation he had with fellow author Joseph heller  (Vonnegut published this anecdote as a poem in the New Yorker). the two writers were at a party thrown by a billionaire when Von-negut joked, “how does it feel to know that our host makes more in one day than Catch-22  [heller’s best-known work] has made in its entire his-tory?” heller  responded, “I’ve got something he can never have.  I’ve got Enough.”

It’s More Important to Be happy than to Be Rich 13

Your Money and Your Life

Sudden RichesSome folks believe their worries would vanish if only they had a six-figure salary. others play the lottery because they think winning would solve their problems. But it’s not how much you earn that determines how happy you are—it’s how much you spend in relation to your income.

take pro athletes: the average NFL player earns $1.1 million per year, and the aver-age NBA player makes $4 million per year. Yet even these vast incomes sometimes aren’t enough to cover what players spend. In a recent issue of Sports Illustrated, Pablo S. torre described how and why athletes go broke (you can read his article at http://tinyurl.com/brokeathletes). he writes that after 2 years of retirement, “78% of former NFL players have gone bankrupt or are under financial stress. ” Within 5 years of retirement, roughly 60% of former NBA players are in similar positions. 

Lottery winners have the same kinds of problems. A 2001 article in The American Economic Review found that after receiving half their jackpots, the typical lotto win-ner had only put about 16% of  that money  into savings.  It’s estimated that over a quarter of  lottery winners go bankrupt. take Bud Post: he won $16.2 million in 1988. Within weeks of receiving his first annual payment of nearly half a million dol-lars, he’d spent $300,000. During the next few years, Post bought boats, mansions, and airplanes, but trouble followed him everywhere. “I was much happier when I was broke,” he’s reported to have said. When he died in 2006, Post was living on a $450  monthly  disability  check. You  can  read  more  about  him  here:  http://tinyurl.com/budpost.

of course, not every wealthy person is so profligate. In fact, according to thomas Stanley and William Danko, most millionaires are careful with their money. In their classic book The Millionaire Next Door (Pocket, 1998), Stanley and Danko catalog the characteristics of the quiet millionaires—those who live in average neighbor-hoods, drive average cars, and work average jobs. these folks are able to build and maintain wealth because they keep their spending in check—even as their incomes rise. the authors say the three words that best describe the affluent are “frugal fru-gal frugal.”

So even if you come into a windfall like an inheritance or a bonus—or even a lottery jackpot—take your cue from the frugal millionaires: Don’t spend it all in one place. (Page 304 has more about how to handle a windfall.)

Chapter 114

Knowing that you have Enough can be better than having billions of dol-lars. If you’re obscenely rich but aren’t happy, what good is your money? Contentment  comes  from  having  Enough—not  too  little  and  not  too much. But how much is Enough?

there’s no simple answer. What’s Enough for you may not be Enough for your best friend. And what you need to remain at the peak of the Fulfill-ment Curve (page 9) will change with time, so Enough is a bit of a moving target. It’s tough to define Enough, but there are some steps you can take to figure out what it means to you.

Understand your goals and valuesIf you don’t know why you’re earning and spending money, then you can’t say when you have Enough. So take time to really think about what hav-ing Enough means to you. Discuss it with your family, and explore the idea with your best friend. Is being debt-free Enough? Being able to pay cash for a new boat? having a million dollars saved for retirement? Decide what Enough means to you, and then write it down. If you don’t have an end in sight, you’re at greater risk of getting stuck in the rat race.

Personal goals are so critical to financial success that you’ll spend all of Chapter 2 learning how to set them.

Practice conscious spendingBecause the notion of Enough is so vague, the best way to approach it is to be mindful of your financial habits. the act of consciously choosing how you spend can help you make purchases that are in line with your goals and values.

Ramit Sethi popularized the concept of conscious spending in his book I Will Teach You to Be Rich  (Workman Publishing, 2009). the  idea  is  to spend with intent, deliberately deciding where to direct your money in-stead of spending impulsively. Sethi argues that it’s okay to spend $5,000 a year on shoes—if that spending is aligned with your goals and values and you’ve made a conscious choice to spend this way (as opposed to spend-ing compulsively—see page 65).

It’s More Important to Be happy than to Be Rich 15

If  you’re  new  to  conscious  spending,  try  asking  yourself  the  following questions:

•  Did I receive value from this equal to the amount I spent? In other words, did you get your money’s worth? You already know that $100 spent on one thing isn’t always as good as $100 spent on another. Con-scious spending is about striving to get the most bang for your buck.

•  Is this spending aligned with my goals and values? Conscious spending means prioritizing: putting your money toward the things you  love—and  cutting  costs  mercilessly  on  the  things  you  don’t.  If you’re happy with the coffee at the office, then don’t waste your mon-ey at Starbucks. But if your extra-hot nonfat caramel latte is the high-light  of  your  day,  then  buy  the  latte!  Spend  only  on  the  things  that matter to you.

the box below tells the story of Chris Guillebeau, who has made a lot of unorthodox choices to be sure his spending matches his priorities.

Your Money and Your Life

The Art of Non-ConformityChris Guillebeau takes conscious spending to an extreme. At 32, he’s defined what’s important to him and is willing to make sacrifices to be sure his spending is aligned with his goals and values. one of his ambitions is to visit every country in the world by his 35th birthday. (As of this writing, he’s visited 124 of 192 countries, and he’s got 3 years to go.)

travel is expensive, so in order to meet his goal, Guillebeau has made it his top pri-ority. “Some people think I’m crazy,” he says. “I don’t own a car, so I walk everywhere. I  don’t  even  like  spending  a  few  bucks  to  use  public  transportation.  But  I  spend thousands of dollars to fly all over the world.”

By doing without the things that aren’t meaningful to him—like a car—Guillebeau can afford the things he’s passionate about. to read more about his unconventional life, check out his blog at www.chrisguillebeau.com, and look for his upcoming book, The Art of Non-Conformity (Perigee, 2010).

Reduce clutter If you have so much Stuff that you need to rent a storage shed, you have more than Enough. If the Stuff leads to clutter that stresses you out, you’ve passed  the  peak  of  the  Fulfillment  Curve  and  your  added  luxuries  are bringing you less happiness, not more. 

Chapter 116

Purging clutter can be a profound experience, but it can be difficult, too: You don’t want to toss anything out because you might need it someday, or it has sentimental value, or it may be worth something.

Getting rid of Stuff only hurts for a little bit. once you’ve pared your be-longings, it’s like a weight has been lifted; you feel free. Some people find the process so liberating that they go farther and practice voluntary sim-plicity, even to the point of moving into a smaller home. For example, Dave Bruno  is  chronicling  his  fight  against  materialism  at  his  website  (http://tinyurl.com/100thingchallenge); his goal is to own only 100 personal items.

Living Green: The Missing Manual suggests lots of great ways to de-clutter your life.

Seek balanceA balanced life is a fulfilling life. to find balance, you have to figure out how much is Enough for you—the point where you’re content with what you have and can say “this much, but no more.” 

once you define Enough, you gain a sense of freedom. You’re no longer caught up in the rat race and have time to pursue your passions. You can surround yourself with family and friends, and rediscover the importance of  social capital—the  value  you  get  from  making  personal  connections with people in your community (see page 306). And because you no lon-ger feel compelled to buy more Stuff, you can use your money to save for things that truly matter.

It’s Not About the MoneyIf vast riches won’t bring you peace of mind, what will?

In a 2005 issue of the Review of General Psychology, Sonja Lyubomirsky, Kennon  Sheldon,  and  David  Schkade  looked  at  years  of  research  to  fig-ure out what contributes to “chronic happiness” (as opposed to temporary happiness). Based on their survey, they came up with a three-part model:

It’s More Important to Be happy than to Be Rich 17

•  About half of your happiness is biological.  Each  person  seems  to have a happiness “set point,” which accounts for roughly 50% of your sense  of  well-being.  Because  this  set  point  is  genetic,  it’s  hard  to change.

•  Another 10% of happiness is based on circumstances—external factors beyond your control. these include biological traits like age, race, nationality, and gender, as well as things like marital status, oc-cupational status, job security, and income. Your financial situation is part of this 10%—but only a part—which means it accounts for just a fraction of your total happiness.

•  The final 40% of happiness comes from intentional activity—the things you choose to do. Whereas  circumstances  happen  to  you, intentional activity happens when you act by doing things like exercis-ing, pursuing meaningful goals, or keeping a gratitude journal.

According to the authors, because circumstances—including your financial situation—play such a small  role  in your general contentment,  it makes more sense to boost your bliss through intentional activity, by controlling the things you can and ignoring those you can’t. (You can read the entire article at http://tinyurl.com/hmodel.)

Although  your  financial  situation  plays  only  a  small  role  in  your  overall happiness,  most  people  believe  it’s  more  important  than  that.  Because of this, many Americans spend their lives striving for more money and possessions—but find that this materialism makes them less happy. 

If you’re caught up in the rat race, you may be dealing with things like cred-it card debt,  living paycheck to paycheck, fighting with your spouse over money,  and  working  a  job  you  hate. these  problems  all  stem  from  one issue: lack of control. When you feel like you have no control over money, you’re worried and stressed. By taking charge of your finances, you can get rid of many of  these stressors and be happier. Wealth gives you options and makes it easier to focus on things that can make you content.

this book will teach you specific ways to gain control of your finances. the first step to leading a rich life is learning how to set priorities.

Chapter 118

On the Money

Happiness by the NumbersIn their book Happiness, Ed Diener and Robert Biswas-Diener talk about the hap-piness formula, their attempt to quantify all this psychological stuff about money and well-being.

they found that a larger income generally makes people happier—but not always. It’s not just how much you make that determines how satisfied you are with your life, but how that money relates to your desires. You might say that happiness  is equal to what you have divided by what you want.

Say,  for  instance, that you’re a famous author earning $200,000 a year. on paper, that sounds like a lot of money, but if you yearn for expensive luxuries and experi-ences, you may actually feel poor. on the other hand, if you’re a struggling writer bringing in $40,000 a year, you can be happy as long as your expectations are low—that is, if you don’t want more than you have. this is why frugality is so important. (Chapter 5 is chock-full of tips for spending less.)

For another attempt to quantify well-being, take a look at this happiness formula from Dilbert creator Scott Adams: http://tinyurl.com/happy-dilbert.  

Living a Rich LifeLiving richly means figuring out what to spend your time, money, and en-ergy on—and what to ignore. Since you can’t have everything, you have to prioritize. this means spending money on things that matter to you—and skimping on things that don’t. 

Psychologists generally agree that a life well-lived is rich in:

•  Security. It’s hard to be happy when you’re constantly worrying about how to pay the bills. If you have money, you don’t have to worry about those things. (But, as you now know, you don’t have to be rich to be happy.) By living below your means and avoiding debt, you can gain some financial control over your life. 

•  Relationships. true  wealth  comes  from  relationships,  not  from  dol-lars and cents. Wealthy or poor, people with five or more close friends are more apt to describe themselves as happy than those with fewer. A long-term, loving partnership goes hand in hand with this. And as you’ll  learn  later  (page  306),  social  capital  can  be  worth  as  much  as financial capital.

It’s More Important to Be happy than to Be Rich 19

•  Experiences. As explained in the Note on page 8, memories tend to grow more positive with time, but Stuff usually drops in value—both actual value and perceived value. As Gregory Karp writes in The 1-2-3 Money Plan (Ft Press, 2009), “Experiences appreciate, assets depreci-ate.” And in Your Money and Your Brain (Simon & Schuster, 2008), Jason Zweig notes, “Doing and being are better than having.”

Remember  these  three pillars of happiness and you can build a  rich  life even on a limited income. 

to further  improve your relationship with money, keep these guidelines in mind: 

•  Prioritize. Spend on the things that make you happiest. there’s noth-ing wrong with buying things you’ll use and enjoy—that’s the purpose of money. If you’re spending less than you earn, meeting your needs, and saving for the future, you can afford things that make life easier and  more  enjoyable.  (For  another  way  to  prioritize,  see  the  box  on page 20.)

•  Stay healthy. there’s a strong tie between health and happiness. Any-one who’s experienced a prolonged injury or  illness knows  just how emotionally—and  financially—devastating  it  can  be.  Eat  right,  exer-cise, and get enough sleep (Your Body: The Missing Manual has loads of tips on how to do all those things).

•  Don’t compare yourself to others. Financially, psychologically, and socially,  keeping  up  with  the  Joneses  is  a  trap.  You’ll  always  have friends  who  are  wealthier  and  more  successful  in  their  careers  than you. Focus on your own life and goals.

•  Limit media exposure. Mass media—especially tV—tries to persuade you that happiness depends on things you don’t really need and can’t afford. Studies have found that watching lots of tV can influence your levels of materialism—how much you think you need to be happy.

•  Simplify. the average Joe believes that materialism is the path to hap-piness—but the average Joe is wrong. Research shows that material-ism actually  leads to unhappiness and dissatisfaction. By simplifying your life and reducing the amount of Stuff you own (or want to own), you’ll save money and be happier.

•  Help others. Altruism is one of the best ways to boost your happiness. It  may  seem  counter-intuitive  (and  maybe  even  a  little  self-serving), but donating to your church or favorite charity is a proven method for brightening your day.

Chapter 120

•  Embrace routine. Emerson wrote, “A foolish consistency  is  the hob-goblin of  little minds,” but  there’s evidence  that  some  consistency  is conducive  to  contentment.  In  Happier  (McGraw-hill,  2007), tal  Ben-Shahar  recommends  building  routines  around  the  things  you  love: reading, walking, gaming, knitting, whatever. Because it can be diffi-cult  to  make  the  time  for  these  activities,  he  argues  that  we  should make rituals out of them. If you enjoy biking, make a ritual out of riding to the park every evening, for example. (See the box below for tips on finding time for what you love.)

•  Pursue meaningful goals. As you’ll learn in the next chapter, the road to wealth is paved with goals, and the same is true of the road to hap-piness.  But  for  a  goal  to  be  worthwhile,  it  has  to  be  related  to  your values and interests—it has to add something to your life. Chapter 2 will help you decide what goals to set.

On the Money

Fun Things FirstYou lead a busy life. there never seems to be enough time to do the things you re-ally want, like doing yoga, running, or having a weekly night out with your sweetie. With so much already on your plate, how can you fit it all in? 

In  Work Less, Live More  (Nolo Press, 2007), Bob Clyatt argues  that  you  can make time for fun stuff. the secret, he says, is prioritizing:

Imagine you have an empty jar, a collection of a few large rocks, and several hand-fuls  of  gravel. Your  task  is  to  put  all  the  large  and  small  rocks  into  the  jar.  one approach would be to pile all the gravel first, but doing so would leave room for only one or two of the large rocks; you wouldn’t get everything to fit. Switch your approach and put the large rocks in first, and you’ll find that the gravel will all fit nicely around the empty space. If a bit of gravel doesn’t fit at the end, you’ve not lost much.

Let too many little things take priority, and there never seems to be time for the big things. Consider the Big Rocks to be really important things you want to ac-complish in life, the things that define you. Get the big things in first, work on the right projects and priorities, and let the little stuff fit in around the edges. Let your Big Rocks be non-negotiable priorities in your weekly calendar—and learn to say “no” when other things begin to intrude. then fit those other things in where you can.

So if running makes you happy, schedule your runs—and then fit the rest of your life around them. Don’t ignore your obligations, but make the stuff you have to do fit around the stuff you want to do, not the other way around.

It’s More Important to Be happy than to Be Rich 21

the bottom line is that if you can’t be content, you’ll never lead a rich life, no matter how much money you have. the key to money management—and happiness—is being satisfied. It’s not how much you have that makes you happy or unhappy, but how much you want. If you want less, you’ll be happy with less. this isn’t a psychological game or New Age mumbo-jumbo, it’s fact: the lower your expectations, the easier they are to fulfill—and the happier you’ll be.

that’s not to say you should lead an aimless life of poverty; quite the op-posite,  in  fact.  But  most  people  confuse  the  means  with  the  ends. they chase after money and Stuff in an attempt to feel fulfilled, but their choices are impulsive and random. their “retail therapy” doesn’t address the root cause of their unhappiness: they lack goals and an underlying value sys-tem to help guide their decisions.

In the next chapter, you’ll learn how to create meaningful financial goals that are aligned with your passions. then you’ll be able to use these goals to  make  better  decisions  about  money. these  choices  will,  in  turn,  help you live a happier life.

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